The Firm Divided: Manager-Shareholder Conflict And The Fight For Control Of The Modern Corporation by Graeme Guthrie

The Blurb On The Back:

A battle is being fought within modern corporations.

Shareholders want managers to make their shares as valuable as possible, managers want shareholders to leave them alone, and the board of directors is caught in the middle.  The Firm Divided shows how strong boards persuade managers to do what’s best for shareholders – and how weak board don’t.

Graeme Guthrie blends the stories of particular firms and individuals with the insights of scholarly  research, inhaling understanding of how seemingly separate events are examples of a fundamental divide in the nature of the firm: the separation of ownership and control that results in manager-shareholder conflict.  Boards of directors are caught in the middle trying to weigh their fiduciary duty to shareholders against the close ties that inevitably bind them to senior executives.  A firm’s directors can influence the outcome of this conflict by monitoring managers, providing incentives for managers to work in shareholders’ best interests, delegating monitoring to outside parties, and determining the effectiveness of the market for corporate control.

The Firm Divided provides conceptual insight, underpinned by research into corporate governance, into board-manager interactions.  It shows how tools that can benefit shareholders when used by strong boards can actually harm shareholders when used by weak boards.  Guthrie provides a 360 degree view of firms exploring the ways in which each player pursues their own goals with examples from a range of firms in diverse industries.

You can order The Firm Divided: Manager-Shareholder Conflict And The Fight For Control Of The Modern Corporation by Graeme Guthrie from Amazon UK, Waterstone’s or UK.  I earn commission on any purchases made through these links.

The Review (Cut For Spoilers):

Graeme Guthrie is Professor of Finance and Economics at Victoria University of Wellington, New Zealand.  In this elegantly constructed book he adopts a classical economics approach using case studies to examine the conflicting interests of executives, boards and shareholders and how difficult it is for shareholders to manage and monitor executives and hold executives to account but I wasn’t convinced by some of his arguments about executive pay.

The book is divided into four parts: Monitor; Motivate; Delegate; and Sell.  Each chapter focuses on a different company to make a specific point and each chapter builds on the arguments made in the preceding chapters.  The majority of the case studies are on US companies although there is one British company featured in the Glazer takeover of Manchester United and one Canadian company in the chapter looking at Lions Gate.  Guthrie uses a classical economics lens to examine his subject, which means that every player – CEO, board members and shareholders are acting to advance their own best interests.  In this case it pretty much presumes that everyone is acting in their own financial interests.  

The advantage of this is that it makes it easier to understand some of the tensions between CEOs, boards and shareholders but, as Guthrie himself acknowledges, it doesn’t mean that this exactly reflects what was happening with regards to the case studies he uses in the book.  Additionally, given that there’s a lot of discussion in the book about executive pay, I think it also sidesteps the issue of excessive pay.  This is because although Guthrie looks at the topic in the course of the book, I came away thinking that he downplayed it e.g. in the case of Michael Eisner he seeks to relativise his pay over the course of his employment but when you’re talking about pay of $576 million I wanted to know how a CEO is still supposed to be incentivised at that level.  To be fair, Guthrie does talk about incentivisation in terms of wanting peer admiration and respect (and also looks at executives who were dismissed and found themselves unable to obtain comparable positions) but when you’re earning millions of dollars you have to wonder at what point they’re actually still incentivised to do well for the company.

Guthrie does do an excellent job of showing how difficult it is for shareholders to hold executives to account and how boards can be important in helping with that (although I did want to see more analysis of board make up than what is in the book).  Particularly good is the final section, which looks at takeovers and how it pits shareholder and executive interests in conflict, where Guthrie gives clear-headed and easy-to-understand explanations of the issues surrounding poison pill tactics.

Also well written are the explanations of the difficulties for shareholders in monitoring and controlling boards and executives.  This includes disparities in information, lack of sufficient shares to exercise control and the difficulties in influencing boards because of the way nominations work (including problems with making a proxy list).  Guthrie explains how third parties have worked to fill in some gaps, e.g. consultants who examine and advise on executive pay, and analysts who purport to look at corporate performance and how this can lead to conflicts of interest in the case of institutional investors and investment banks.  I would have liked to understand more why institutional investors don’t try to band together more, which may be because of US legal restrictions on it – I don’t know but it seemed to me to be something that would help counter the free rider problem that Guthrie does explore in depth and help counter some of the issues.  I would have also been interested in seeing what (if any) impact short sellers have on corporate governance because I have worked in publicly traded companies where it was response to short selling that dominated board discussions and seemed to have the most influence of corporate policy as they sought to demonstrate short term profitability.

These criticisms aside though, I found this a generally interesting read that’s accessible to anyone interested in corporate governance and how executives are supposed to manage companies.  It certainly made me come away wondering what the point of owning shares is, given how little control shareholders actually exercise in practice. 

Thanks to the Amazon Vine Programme for the review copy of this book.

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